Financial Times FT.com

Electric and hybrid: Sales feed off hype and subsidy

By John Reed and Jonathan Soble

Published: October 1 2010 17:18 | Last updated: October 1 2010 17:18

After years of development – and substantial amounts of hype – a new wave of battery-powered cars will begin arriving in Japan and the US by December, led by Nissan’s Leaf and General Motors’ Chevrolet Volt.

All the big carmaking groups plan to produce battery-powered cars over the coming three years, from China’s SAIC to Germany’s BMW – which plans an entire new sub-brand for electric cars from 2013.

Electric and plug-in hybrid cars have captured policy­makers’ imaginations, prompting governments around the world – even in the fiscally stretched US, Spain, Portugal, and the UK – to pledge big subsidies to early buyers.

Electric cars have also galvanised private investors, allowing Tesla Motors and Better Place, Silicon Valley startups in electric cars and charging infrastructure, respectively, to raise hundreds of millions of dollars for untested businesses during the depths of the credit crunch.

The technological bandwagon forming around plug-in cars is remarkable, given the serious doubts about whether consumers will accept the cars’ high prices and short range. Even with subsidies worth $7,500 in the US and £5,000 ($7,900) in the UK, the Leaf and the Volt will be priced more like small luxury cars than mass-market vehicles.

In a poll carried out for the Financial Times by Nielsen in September, three-quarters of respondents in the US and the UK said they would consider buying an electric car. However, more than half in each country said they were unwilling to pay any more for them.

The oil price and the rate at which lithium-ion batteries’ performance will improve are two other variables affecting the adoption rate for electric cars.

Japan’s car industry might seem a good place to look for clues about what is to come. However, even there, opinions about what customers will want are sharply divided.

On the one hand Carlos Ghosn, chief executive of Nissan, plans to launch four electric cars for Japan’s third largest carmaker by 2014, and another four at its French ally Renault. A long-time sceptic about hybrid cars – which he sees as an interim technology – he has predicted that one in 10 cars globally will run on battery power alone by 2020.

Toyota, for its part, agreed in May to invest $50m in Tesla, and plans to introduce a battery-only city car in 2012. However, Takeshi Uchiyamada, who heads the carmaker’s product development, says it will produce only “a few thousand” of the small commuter vehicles to start, and bets that more consumers will want the hybrid cars, whose global sales Toyota dominates and in which it has invested billions of dollars.

Both companies can point to recent achievements in their home market to support their favoured technology. The Leaf, due to arrive in dealerships in December, exceeded Nissan’s first-year Japanese sales target of 6,000 vehicles in just two months. The Prius was Japan’s best-selling car of any kind for the 16 months ending in August.

But the numbers say little about real consumer demand – and highlight the extent to which plug-in cars will remain creatures of subsidies for years to come.

The Prius took Japan’s top sales spot only after the government introduced subsidies last year worth more than Y400,000 ($4,770) for low-emission vehicles. The incentive expired in September and Toyota executives are braced for a sharp fall in sales.

JD Power, the consultancy, recently revised upward its forecast for electric vehicles, which it now predicts will overtake hybrids by 2015, mostly because of government incentives. Even so, it says both pure electric and plug-in hybrid cars will account for a scant 3 per cent the overall world market by 2020.

Price aside, driving range remains a formidable barrier to pure electric cars. For this reason GM is including a petrol “range extender” on the Volt for longer trips. Even so, GM is keeping expectations for electric cars modest.

Battery limitations will hold back the “electric revolution” says Frank Weber, head of corporate and product planning at GM’s Opel unit, who played a central role in the Volt’s development. “It is a partial answer for a particular use: there will be a lot of battery electric vehicles in the future for urban usage.”

He adds: “When we ask people what they are expecting from an electric vehicle, they say ‘500km of range, absolutely quiet, doesn’t emit anything, and I’m willing to spend €1,000 more for that vehicle than my conventional one’.”

Yet the technology could surprise. Analysts say a fresh spike in petrol prices as the world economy recovers could lower the break-even point for electric cars. Early drivers of electric cars have also raved about their high torque and lack of engine noise. Some have found their limited ranges easier to accept than they had thought.

BMW recently tested 600 electric versions of its Mini small car in Germany, the UK and the US in one of the industry’s biggest tests of battery-powered cars to date. It found that most drivers charged the car only two or three times a week and mostly used charging points at home or at work.

“Before they drove the car, they wanted us to install a charging pole every mile,” says Ulrich Kranz, the BMW executive heading its “Project i” electric cars programme. “After a week this [desire] was gone”.

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